Peckham conjures up cliched images. The south London district is either a place of fear and despair, where schoolboy Damilola Taylor was killed, or it is a comic wilderness of wind-blasted high rises and the chirpy ducking and diving of Only Fools and Horses.

Both images are false. The crime rate is lower than in neighbouring areas. And only the first series of the now-classic TV sitcom was filmed in Peckham. The following 16, which cemented the image of the area, were filmed in Bristol.

The true picture of Peckham, while one of the poorest parts of Britain, is altogether stranger and more dynamic. And it is one that local artists - including Antony Gormley, creator of Angel of the North, Zandra Rhodes, the dress designer, and Tom Phillips, the painter - are working on as they help local people reshape their environment.

Gormley, who has a studio on Bellenden Road, has designed a series of metal bollards, which he has nicknamed "the penis, the egg, the peg and the snowman". Rhodes has designed street lighting, bollards, pavements and bus shelters that splash East Dulwich Road a vibrant pink. And Phillips, a Royal Academician who has painted Salman Rushdie and Iris Murdoch, has designed barcode-patterned pavements, a giant silver arch for a wildlife garden and street lamps that illuminate in a neon heart shape.

Not that these works of the great and good have been accepted automatically. The people who finally give the nod are the residents of the 3,324 terraced houses and shops in a part of Peckham, known as the Bellenden Renewal Area.

Artists Will Woodward, who is designing a giant bridge covered in beehives dripping honey, says art and urban regeneration must be done with sensitivity. "Things shouldn't just be done because some artist can make horses' heads or something," he says. "It has to be really thought about, with quality materials and work. In the end, if people don't like it, it doesn't happen."

The artistic makeover is just part of a 10-year project to give residents in the renewal area the opportunity to improve their environment. Southwark council is investing up to £20m in the project, which has already enabled residents to modernise their homes - some of which had no inside toilet - with an improvement grant for new kitchens, bathrooms or roof repairs, up to a maximum of £18,000. While owner occupiers have had to contribute 25% towards the grant, the home improvements came free for people on low incomes or on benefits.

"A lot of the houses were pre-1919 and many were occupied by people in their 80s," says Roger Young, head of the renewal scheme. "We still had three houses with outside toilets. One woman said: 'It would be nice to have a new bathroom, but why would I want a toilet inside the house?'"

He says the project aims to recreate a sense of community. In order to benefit from free group repair schemes for new windows, guttering and garden walls, complete with hidden niches for wheely bins, neighbours have had to talk to each other about what they want and come to a consensus for the whole street.

Young admits there were differences when it came to new windows. "Older residents wanted plastic double-glazed - they said timber windows were impractical and rotted," he recalls. "The younger residents said timber was nicer, sustainable and in keeping with the houses. We said: 'You had better make a decision for the whole street, or we will take our money elsewhere.' In the end, they settled on timber at the front and plastic at the back."

So that people could get a feel for what could be done to their streets and homes, the council organised materials training days to get residents accustomed to the mechanics of building a house.

Local artists volunteered to design lighting, pavements, street decorations and shop fronts. The company that makes the council's regular street furniture has produced the new works, so that repairs and maintenance are straightforward. "Using local artists and local suppliers means we can keep the deals cheaper than employing commercial firms and can keep cash local as well," says Young.

Matt Murphy, chair of the Bellenden renovation area board, says residents now take pride in the locality. "Regeneration has brought people much closer," he says. "Look at this place - everybody loves it and keeps it nice."

Of course, Gormley's "penis" caused a stir. But the traders of Bellenden Road love it so much that they will finance the first production run, while the council pays for the less controversial bollards.

Does Gormley think that art stimulates regeneration? "It seems like it does," he says. "I don't like [art] used as a pump-primer. That is how the Angel of the North has been perceived by the big government agencies and institutions, and that is unfortunate.

"The will to make the Angel came from Gateshead council, which recognised that art has the power to change people's perception of the community they inhabit. It had a great outcome - the perfect integration of art and environment."

Gormley and Rhodes both donated their services free of charge to the project. Rhodes lives in the north of Southwark, in Bermondsey, where she is opening a fashion and textile museum. She hopes that the regeneration scheme will "instil a sense of social pride", following Damilola Taylor's death.

"I think that the council has done an admirable job," she says. "It would have been easy to say this is too big a project. But if you are not going to tackle a project like this, then you are not going to go far in terms of regeneration. The more you can get people involved in thinking about their surroundings, the better.

"All the re-worked street lamps are still the Victorian-style street lamps inside. A wheely bin full of rubbish is not very artistic, but you can do something artistic about where it is stored and how you get at it."

New and improvedBy Alison Benjamin

Some £1.8bn has been earmarked for 135 renewal areas across England. Introduced in the Local Government and Housing Act 1989, to improve the condition of poor-quality private sector housing, the renewal area approach involves councils, residents and local business.

Under the original scheme, local authorities offered house renovation grants to residents, 75% of whom had to be homeowners for the area to be eligible for renewal status. Three-quarters of homes had to be in poor condition and 30% of households on means-tested benefit. In the assessment of Bellenden Road, south London, 78% of houses were privately owned, 84% were considered unfit for human habitation and 38% of households were on benefits.

Changes introduced last month to the 1989 act mean councils now have greater discretion to design their own renewal area strategies.

Areas no longer have to be a certain size and the scheme does not have to last for 10 years. Councils can now provide loans or equity-release schemes as well as grants, and are even able to complusory puchase properties if it is not cost-effective to renovate them.

This is especially relevant in the north of England, where some streets have been abandoned, house prices have collapsed and homeowners require financial assistance to move to more suitable accommodation.

Research by the Office of the Deputy Prime Minsiter found that the renewal area approach has tackled problems of private sector stock condition better than other initiatives.